IT Spend Vs. Revenue: 3 Principles to Apply

This month, I spoke with Khalid Kark, who serves as the global research director for the CIO program within Deloitte LLP. AOTMP® wanted to share some expert insight related to considering what is the proper ratio of technology spend compared to business revenue. Kark said the average overall spend is 4.25%, which is up from 3.64% two years ago, but technology, banking, and insurance organizations typically spend higher than others due to the nature of their industries. He published findings in a 2020 article based on a global survey of more than 1,400 chief information officers and chief experience officers by Deloitte’s U.S. CIO Program, where he cited seven principles for sound technology investment decision making.

I wanted to check in on the relevance of those principles today in a time of the Great Resignation, work environment changes since the pandemic, and industry advancements ranging from the Internet of Things to cloud infrastructure transformation decisions. Kark said the seven principles (see graphic) still stand but he would offer this order for ranking the three most important for any enterprise looking to make technology investment decisions:

Ensure balanced portfolio: “In some companies, a lot of demand and little supply and technology spend is not prioritized. It’s important to have thoughtful conversations at a strategic level. Is technology playing a pivotal role in our growth? It’s important because demand and supply dictate what is being spent. C-Suite leaders can then make thoughtful decisions on overall spend.”

Expect volatility: “This came out true in spades [since the initial report]. At the end of 2019, the pressure and demand to spend were in operational areas; in the past two years, the spend was reallocated to remote support, security, and collaboration tools.

“Revisit the business strategy. It will increase because, as you have now built the collaboration tools, you’ll return focus to the longer-term strategic projects. It’s important to recalibrate quickly with funding. If you have a quarterly or month cap on tech spend, you cannot pivot quickly. Organizations should move from an annual allocation to a more agile, figurative process to reallocate funding as needed. Equip teams to make those calls and keep management in the loop; that can be unnatural for a technology function.”

Measurement of value: “What we find with CIOs /CFOs is that we focus on operational metrics. What is the patching? — 97%. We look at customer and employee satisfaction. How satisfied are they and what is the value they are earning? Better engagement, experience, or collaboration? Look at the NPS [net promoter score measures customer experience programs] score for the whole organization.

“A second element is to measure business outcomes, like customer retention, and technology’s role in supporting them. Third, which is almost ignored by everybody, is ‘What is your profile for future orientation? How equipped are you as a function to handle the future’: geopolitical, clients/organization, talent, and technology?

“One-third of CIOs said a third of their current talent with their current skill set will not be relevant in the near future. That’s a pretty big shift that needs to happen. Are you equipping yourself in-house and partnering with the right teams?”

Kark encourages business leaders to consider investment decisions with these perspectives.

“People at all levels to consider not only where their organizations are today, but how aware and informed they are at meeting the future needs of their businesses. The investments need to be looked at from this perspective. ‘How are we allocating funds?’ It’s important for tech and business leaders to think holistically but also look at the breakdown and be more thoughtful around some of the findings.

“These three are fundamental issues and need to be a part of the bigger thinking in many of the organizations that we’ve come across,” he emphasized.

AOTMP®: Where do you think the ratio of tech budget to revenue stands today or might be heading?

Kark: We have been capturing this since 2015 and have seen a steady increase as percentage of spend. When I talk with business leaders, it’s a starting point for their planning and strategy. Each company’s context may be different. They may want to spend more on a large transformation in place over the next few years or drive competitive advantage. I wouldn’t hold companies to those benchmarks as gospel because every company is different. Spending more doesn’t mean you’re “better.” High-performing leaders in their industries spend slightly more; whether that’s correlation or causation we don’t know, but starting at that number is the most important thing you do.

I feel it will continue to have a healthy increase end-over-end for the next three years. The number of delayed projects today will see momentum and there’s a tremendous amount of investment in building net new capabilities within the business from technology.

AOTMP®: Is there a budget allocation standard for IT departments with small, mid sized, and large enterprises?

Kark: The tech budget spend average is 59% business operations, 26% incremental business change, and 15% business innovation. In general, the percentages hold true, with more variance by industry than the size of the company. Industry dictates the role of technology.

AOTMP®: With all the workforce changes since the last survey, what IT cost centers do you think going forward will be reduced, stay the same, or increase? Kark: My expectation is this would have increased on overall spend as a percentage. If we did this analysis today, allocation across the three budget areas, I would expect to see slightly higher for innovation and slightly lower for business change, and the same spend for innovation. There have been some efficiencies achieved but also increased demand. For instance, the scale of business may offset the decrease that moving to the cloud might offer.

A shifting mindset of IT spend from cost to investment has come with digital transformation, including advances in the areas of cloud, automation, and legacy. IT decision makers should ensure a financial business partner in this discussion be identified, if not already in place, on the finance side. A dedicated finance staff tasked with modeling, managing, and measuring the value of IT investments can be helpful, but only 20% of CIO survey participants report having such a person on their staff.